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The world's central banks have a problem.
When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.
In a new piece, Citi's Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates.
Whatever the strength of the arguments, the chances of an administration taking the decision to abolish cash seem vanishingly small.
Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction?
Cash therefore gives people an easy and effective way of avoiding negative nominal rates.
Buiter's note suggests three ways to address this problem:
Remove the fixed exchange rate between currency and central bank reserves/deposits.
originally posted by: roadgravel
And if the card terminals don't work then no purchase.
originally posted by: Iamthatbish
When you add this "unaccountable " money to your budget, I feel this is just a way to be certain the people aren't buying drugs or girl scout cookies.